Equilibrium Indeterminacy When Only Some Firms Are Scalable

Oscar Pavlov () and Mark Weder ()
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Oscar Pavlov: Tasmanian School of Business & Economics, University of Tasmania, https://discover.utas.edu.au/Oscar.Pavlov
Mark Weder: Department of Economics and Business Economics, Aarhus University, Denmark, https://pure.au.dk/portal/en/persons/mweder%40econ.au.dk/

No 2026-03, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: We study a macroeconomy in which fims differ in the strength of scale economies. A subset of firms operates under increasing returns to scale, which endogenously leads them to become larger, capture greater market shares, and exert more goods-market power than peers. The framework can simultaneously account for observed employment shares and markups of top firms. We characterize how heterogeneity in productivity and scalability affects aggregate outcomes and the propagation of shocks. We show that for empirically relevant parameterizations, the heterogeneity gives rise to equilibrium indeterminacy, allowing for self-fulfilling fluctuations. Using an estimated version of the model, we quantify the extent to which non-fundamental disturbances ("animal spirits") contribute to business cycle fluctuations in key macroeconomic aggregates.

Keywords: Scalable technologies; Business cycles; Indeterminacy; Firm heterogeneity (search for similar items in EconPapers)
JEL-codes: E32 E71 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2026
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